FTB Publication 1001 2020 Supplemental Guidelines to California Adjustments

FTB Publication

1001

2020

Supplemental Guidelines to

California Adjustments

Table of Contents

What¡¯s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Income

Wages, Salaries, Tips, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Taxable Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Dividend Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

IRA Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Pensions and Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Health Savings Account (HSA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Social Security Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Capital Gains or Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Additional Income

Taxable Refunds, Credits, or Offsets of State and Local Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Alimony Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Business Income or (Loss) ¨C Depreciation, Amortization, and Property Expensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Business Income or (Loss) ¨C Adjustments to Basis or Business Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Other Gains or Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Rents, Royalties, Partnerships, S Corporations, Trusts, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Unemployment Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Other Income/Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Adjustments to Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Itemized Deductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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Page 2 FTB Pub. 1001 2020

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State of California ¡ª Franchise Tax Board

FTB Pub.1001

Supplemental Guidelines to California Adjustments

What¡¯s New

American Rescue Plan Unemployment

Compensation ¨C The American Rescue Plan

Act of 2021 enacted on March 11, 2021, allows

an exclusion from income up to $10,200 of

unemployment compensation paid in 2020,

if your modified adjusted gross income (AGI)

is less than $150,000. In general, California

Revenue and Taxation Code (R&TC) does

not conform to the changes. For California

purposes, all unemployment compensation

is excluded from income. For specific

adjustments due to the American Rescue Plan

Act of 2021 unemployment compensation

exclusion, see instructions in this publication

and get the Schedule CA (540), California

Adjustments ¨C Residents, or Schedule

CA (540NR), California Adjustments ¨C

Nonresidents or Part-Year Residents. The

federal exclusion may result in a change to

your federal adjusted gross income that may

impact your California tax forms.

Small Business COVID-19 Relief Grant

Program ¨C For taxable years beginning

on or after January 1, 2020, and before

January 1, 2030, California allows an

exclusion from gross income for grant

allocations received by a taxpayer pursuant

to the COVID-19 Relief Grant under Executive

Order No. E 20/21-182 and the California

Small Business COVID-19 Relief Grant

Program established by Section 12100.83 of

the Government Code. For more information,

see instructions in this publication and get

Schedule CA (540) or Schedule CA (540NR).

Income Exclusion for Rent Forgiveness

¨C For taxable years beginning on or after

January 1, 2020, and before January 1, 2025,

gross income shall not include a tenant¡¯s rent

liability that is forgiven by a landlord or rent

forgiveness provided through funds grantees

received as a direct allocation from the

Secretary of the Treasury based on the federal

Consolidated Appropriations Act, 2021. For

more information, see instructions in this

publication and get Schedule CA (540) or

Schedule CA (540NR).

Setting Every Community Up for Retirement

Enhancement (SECURE) Act ¨C The SECURE

Act was enacted on December 20, 2019. In

general, California R&TC does not conform

to the changes. California taxpayers continue

to follow the Internal Revenue Code (IRC)

as of the specified date of January 1, 2015,

with modifications. California law does not

conform to the following federal provisions

under the SECURE Act:

? Repeal of maximum age of 70?

for traditional individual retirement

arrangement (IRA) contributions.

? Expansion of IRC Section 529 qualified

tuition program accounts to cover costs

associated with registered apprenticeship

and qualified education loan repayments.

The above list is not intended to be allinclusive of the federal and state conformities

and differences. For specific adjustments,

see instructions in this publication and get

Schedule CA (540) or Schedule CA (540NR).

Coronavirus Aid, Relief, and Economic

Security (CARES) Act ¨C The federal CARES

Act was enacted on March 27, 2020. In

general, California R&TC does not conform

to the changes. California taxpayers continue

to follow the IRC as of the specified date of

January 1, 2015, with modifications. California

law does not conform to the following federal

provisions under the CARES Act:

? Charitable contributions changes

? Exclusion for certain employer payment of

student loans

? Business interest limitations

? Health-savings account changes

California law conforms to the following

federal provisions under the CARES Act:

? Temporarily increases the amount of

loans allowable from a qualified employer

plan to $100,000 for coronavirus-related

relief and delays by one year the due date

for any repayment for an outstanding

loan from a qualified employer plan if

requirements are met.

The above lists are not intended to be allinclusive of the federal and state conformities

and differences. For specific adjustments,

see instructions in this publication, and get

Schedule CA (540) or Schedule CA (540NR),

or refer to the R&TC.

Paycheck Protection Program (PPP) Loans

Forgiveness ¨C For taxable years beginning on

or after January 1, 2019, California law allows

an exclusion from gross income for covered

loan amounts forgiven under the federal

CARES Act, Paycheck Protection Program

and Health Care Enhancement Act, Paycheck

Protection Program Flexibility Act of 2020, or

the Consolidated Appropriations Act, 2021.

The Consolidated Appropriations Act, 2021,

allows deductions for eligible expenses paid

for with covered loan amounts. California

law conforms to this federal provision, with

modifications. For California purposes, these

deductions do not apply to an ineligible

entity. ¡°Ineligible entity¡± means a taxpayer

that is either a publicly-traded company or

does not meet the 25% reduction from gross

receipts requirements under Section 311 of

the Consolidated Appropriations Act, 2021.

For more information, see instructions in this

publication or R&TC Section 17131.8, and get

Schedule CA (540) or Schedule CA (540NR).

Revenue Procedure 2021-20 allows taxpayers

to make an election to report the eligible

expense deductions related to a PPP loan on a

timely filed original 2021 tax return including

extensions. If a taxpayer makes an election

for federal purposes, California will follow the

federal treatment for California tax purposes.

Advance Grant Amount ¨C For taxable years

beginning on or after January 1, 2019,

California law conforms to the federal law

regarding the treatment for an emergency

Economic Injury Disaster Loan (EIDL) grant

under the federal CARES Act or a targeted

EIDL advance under the Consolidated

Appropriations Act, 2021.

Worker Status: Employees and Independent

Contractors ¨C Some individuals may be

classified as independent contractors for

federal purposes and employees for California

purposes, which may also cause changes

in how their income and deductions are

classified. For specific adjustments, see

instructions in this publication and get

Schedule CA (540) or Schedule CA (540NR).

Rental Real Estate Activities ¨C For taxable

years beginning on or after January 1, 2020,

the dollar limitation for the offset for rental

real estate activities shall not apply to the low

income housing credit program. For more

information, see R&TC Section 17561(d)(1),

and get form FTB 3801-CR, Passive Activity

Credit Limitations.

R&TC Section 41 Reporting Requirements ¨C

Beginning in taxable year 2020, California

allows individuals and other taxpayers

operating under the personal income tax

law to claim credits and deductions of

business expenses paid or incurred during

the taxable year in conducting commercial

cannabis activity. Sole proprietors conducting

a commercial cannabis activity that is

licensed under California Medicinal and

Adult-Use Cannabis Regulation and Safety

Act should file form FTB 4197, Information

on Tax Expenditure Items. The FTB uses

information from form FTB 4197 for reports

required by the California Legislature. For

specific adjustments, see instructions in this

publication and get Schedule CA (540) or

Schedule CA (540NR). Get form FTB 4197 for

more information.

Net Operating Loss Suspension ¨C For taxable

years beginning on or after January 1, 2020,

and before January 1, 2023, California has

suspended the net operating loss (NOL)

carryover deduction. Taxpayers may continue

to compute and carryover an NOL during the

suspension period. However, taxpayers with

net business income or modified adjusted

gross income of less than $1,000,000 or with

disaster loss carryovers are not affected by

the NOL suspension rules.

The carryover period for suspended losses is

extended by:

? Three years for losses incurred in taxable

years beginning before January 1, 2020.

? Two years for losses incurred in taxable

years beginning on or after January 1, 2020,

and before January 1, 2021.

? One year for losses incurred in taxable years

beginning on or after January 1, 2021, and

before January 1, 2022.

For more information, see R&TC

Section 17276.23 and get form FTB 3805V,

Net Operating Loss (NOL) Computation

and NOL and Disaster Loss Limitations ¨C

Individuals, Estates, and Trusts.

Excess Business Loss Limitation ¨C The

federal CARES Act made amendments to

IRC Section 461(l) by eliminating the excess

business loss limitation of noncorporate

taxpayers for taxable year 2020 and

retroactively removing the limitation for

taxable years 2018 and 2019. California

FTB Pub. 1001 2020 (REV 05-21) Page 3

does not conform to those amendments. For

taxable year 2020, complete form FTB 3461,

California Limitation on Business Losses, if

you are a noncorporate taxpayer and your net

losses from all of your trades or businesses

are more than $259,000 ($518,000 for

married taxpayers filing a joint return). For

specific adjustments, see instructions in this

publication and get Schedule CA (540) or

Schedule CA (540NR), and form FTB 3461.

General Information

In general, for taxable years beginning on or

after January 1, 2015, California law conforms

to the IRC as of January 1, 2015. However, there

are continuing differences between California

and federal law. When California conforms to

federal tax law changes, we do not always adopt

all of the changes made at the federal level. For

more information, go to ftb. and search

for conformity. Additional information can be

found in the instructions for California Schedule

CA (540) or Schedule CA (540NR), and the

Business Entity tax booklets.

The instructions provided with California

tax forms are a summary of California tax

law and are only intended to aid taxpayers

in preparing their state income tax returns.

We include information that is most useful

to the greatest number of taxpayers in the

limited space available. It is not possible to

include all requirements of the R&TC in the

instructions. Taxpayers should not consider

the instructions as authoritative law.

Conformity

For updates regarding federal acts, go to

ftb. and search for conformity.

Loophole Closure and Small Business and

Working Families Tax Relief Act of 2019 ¨C

The Tax Cuts and Jobs Act (TCJA) signed into

law on December 22, 2017, made changes to

the IRC. California R&TC does not conform to

all of the changes. In general, for taxable years

beginning on or after January 1, 2019, California

conforms to the following TCJA provisions:

? California Achieving a Better Life

Experience (ABLE) Program

? Student loan discharged on account of

death or disability

? Federal Deposit Insurance Corporation

(FDIC) Premiums

? Excess employee compensation

? Excess business loss

Federal Tax Reform ¨C In general, California

R&TC does not conform to all of the changes

under the TCJA. For specific adjustments

due to the TCJA, see instructions in this

publication and the Schedule CA (540), or

Schedule CA (540NR).

Registered Domestic Partners (RDP) ¨C

Under California law, RDPs must file their

California income tax returns using either the

married/RDP filing jointly or married/RDP

filing separately filing status. RDPs have

the same legal benefits, protections, and

responsibilities as married couples unless

otherwise specified.

DIFFERENCES BETWEEN FEDERAL

AND CALIFORNIA LAW

ITEM

If you entered into in a same sex legal union

in another state, other than a marriage,

and that union has been determined to

be substantially equivalent to a California

registered domestic partnership, you are

required to file a California income tax return

using either the married/RDP filing jointly or

married/RDP filing separately filing status.

For purposes of California income tax,

references to a spouse, husband, or wife also

refer to a California RDP, unless otherwise

specified. When we use the initials RDP they

refer to both a California registered domestic

¡°partner¡± and a California registered domestic

¡°partnership,¡± as applicable. For more

information on RDPs, get FTB Pub. 737, Tax

Information for Registered Domestic Partners.

Purpose

Use these guidelines to make adjustments

to federal adjusted gross income that are

necessary because of current year or prior

year differences between California and

federal law. Generally, you report these

adjustments directly on Schedule CA (540

or 540NR). If required to make multiple

adjustments for any one line on Schedule CA

(540 or 540NR), attach a statement to your

return summarizing these adjustments.

In some cases you need to complete other

forms or schedules to figure the adjustment

to carry to Schedule CA (540 or 540NR). See

¡°Order Forms and Publications¡± in your tax

booklet for information about ordering forms

or go to ftb.forms.

WHAT TO DO

FOR CALIFORNIA

Income

Wages, Salaries, Tips, etc.

? Employees and independent

contractors

Some taxpayers may be classified as independent contractors for

federal purposes and as employees for California purposes.

If the taxpayer is classified as an employee for

California purposes, enter the amount reported

as gross income of the business from federal

Schedule C (Form 1040), Profit or Loss From

Business, line 7, as wages on Schedule CA (540),

Part I, Section A or Schedule CA (540NR), Part II,

Section A, line 1, column C.

? Military pay

Special rules apply to active duty military pay and income from

services performed by certain spouses of military personnel.

Native Americans with military pay also see ¡°Native American

earned income exemption¡± in the instructions later in this section.

Get FTB Pub. 1032, Tax Information for Military

Personnel, for more information.

?

Combat zone foreign earned

income exclusion

For taxable years beginning on and after January 1, 2018,

California does not conform to the federal foreign earned income

exclusion for amounts received by certain U.S. citizens or

resident aliens with an abode in the U.S., specifically contractors

or employees of contractors supporting the U.S. Armed Forces in

designated combat zones.

Enter the amount excluded from federal income

on Schedule CA (540), Part I, Section B or

Schedule CA (540NR), Part II, Section B, line 8f,

column C.

?

Combat zone extended to

Egypt¡¯s Sinai Peninsula

The TCJA extended combat zone tax benefits to the Sinai

Peninsula of Egypt. California does not conform.

Enter the amount of combat pay excluded from

federal income on Schedule CA (540), Part I,

Section A or Schedule CA (540NR), Part II,

Section A, line 1, column C. Get FTB Pub. 1032

for more information.

California excludes from income the sick pay received under

these Acts.

Enter qualifying sick pay included in federal

income on Schedule CA (540), Part I, Section A

or Schedule CA (540NR), Part II, Section A,

line 1, column B.

Income exempted by treaty under federal law may be excluded

for California only if the treaty specifically excludes the income

for state purposes. If a treaty does not specifically exempt

income from state income tax, California requires the reporting of

adjusted gross income from all sources.

Enter the amount excluded from federal income

on Schedule CA (540), Part I, Section A or

Schedule CA (540NR), Part II, Section A, line 1,

column C.

? Sick pay received under

the Federal Insurance

Contributions Act and

Railroad Retirement Act

?

Income exempted by U.S.

treaties

Page 4

FTB Pub. 1001 2020 (REV 05-21)

ITEM

DIFFERENCES BETWEEN FEDERAL

AND CALIFORNIA LAW

WHAT TO DO

FOR CALIFORNIA

?

Employee income exclusions

for ridesharing fringe

benefits

Under federal law and the provisions administered by the

Employment Development Department, certain qualified

transportation benefits are excluded from gross income. Under the

California R&TC, there are no monthly limits for the exclusion of

these benefits and California¡¯s definitions are more expansive.

Federal law provides an income exclusion for the value of qualified

parking provided to an employee. Federal law also provides an

income exclusion for commuter highway transportation and transit

passes provided to an employee.

California law provides an income exclusion for compensation or

the fair market value of other benefits (except for salary or wages)

received for participation in a California ridesharing arrangement

(subsidized parking, commuting in a third-party vanpool, a private

commuter bus, a subscription taxipool, and monthly transit passes

provided for employees and their dependents).

Enter the amount of ridesharing fringe benefits

received and included in federal income on

Schedule CA (540), Part I, Section A or Schedule

CA (540NR), Part II, Section A, line 1, column B.

?

California Qualified Stock

Options (CQSOs)

California law provides an income exclusion for California

qualified stock options (issued on or after January 1, 1997, and

before January 1, 2002), that are exercised by an individual who

has earned income for the taxable year from the corporation

granting the CQSO of $40,000 or less; and has exercised options

for no more than 1,000 shares with a combined fair market

value of less than $100,000 (determined at the time the options

are granted). Get FTB Pub. 1004, Equity-Based Compensation

Guidelines, for more information.

Enter on Schedule CA (540), Part I, Section A or

Schedule CA (540NR), Part II, Section A, line 1,

column B the amount included in federal income

that qualifies for the California exclusion.

?

Native American earned

income exemption

Federal law taxes income received by Indians from reservation

sources.

California does not tax federally recognized tribal members living

in California Indian country who earn income from any federally

recognized California Indian country. Military compensation is

considered income from reservation sources.

Native Americans who are domiciled on an Indian reservation and

receive military compensation must refigure any AGI percentage

calculation(s) by first subtracting military compensation from

Federal AGI.

Enrolled members who receive reservation sourced per capita

income must reside in their affiliated tribe¡¯s Indian country to

qualify for tax exempt status. For more information, get form

FTB 3504, Enrolled Tribal Member Certification.

Enter on Schedule CA (540), Part I, Section A or

Schedule CA (540NR), Part II, Section A, line 1,

column B the earnings and/or Schedule CA (540),

Part I, Section B or Schedule CA (540NR), Part II,

Section B, line 8f, column B, any other income

that is included in federal income that is exempt

for California.

?

Clergy housing exclusion

Both California and federal law allow members of the clergy

an exclusion from income for either the rental value of a home

furnished as part of their compensation or for a rental allowance

paid as part of their compensation to the extent it is used to

provide a home.

Effective January 1, 2002, under federal law, the exclusion for

the rental allowance is limited to the fair rental value of the home

(including furnishings and a garage) and the cost of utilities.

California does not limit the exclusion for the rental allowance to

the fair rental value of the home.

Enter on Schedule CA (540), Part I, Section A

or Schedule CA (540NR), Part II, Section A,

line 1, column B the excess housing allowance

exclusion allowed for California over the federal

exclusion.

? Housing exclusion for

state-employed clergy

Effective January 1, 2003, for clergy members employed by the

State of California, up to 50% of gross salary may be allocated

for either the rental value of a home furnished or the rental

allowance paid to them to rent or provide a home.

If the amount of your federal exclusion is

less than your California exclusion, enter the

adjustment on Schedule CA (540), Part I,

Section A or Schedule CA (540NR), Part II,

Section A, line 1, column B. If the amount of

your federal exclusion is greater than your

California exclusion, enter the adjustment on

Schedule CA (540), Part I, Section A or Schedule

CA (540NR), Part II, Section A, line 1, column C.

? Nonresident employee

compensation of merchant

seamen, rail carriers, motor

carriers, and air carriers

For California, nonresidents may exclude the following from

gross income: compensation for the performance of duties of

certain merchant seamen and compensation of an employee of a

rail carrier, motor carrier, or air carrier.

Enter the amount included in federal income that

qualifies for the California exclusion on Schedule

CA (540NR), Part II, Section A, line 1, column B.

Get Pub. 1031, Guidelines for Determining

Resident Status, for more information.

FTB Pub. 1001 2020 Page 5

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